prev


Top 10 Reasons to Stay Short The Euro

This note was originally published November 05, 2014 at 12:38 in Macro

Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND: 

  1. ECB Indecision:  We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
  2. Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.  
  3. ECB All-In:  The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
  4. Into the Shadows:  The ECB has no where left to cut from the ZERO bound in interest rates.  Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.  
  5. Extended Outflows:  Record outflows of investment from Europe will continue to put downward pressure on the EUR.  ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
  6. Broken Quantitatively:  The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
  7. Downward Dog:  Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
  8. Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
  9. Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
  10. Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.

This is a simplified hit parade – ping us if you’d like to dig into any of the points above.

 

Top 10 Reasons to Stay Short The Euro  - chart2

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Top 10 Reasons to Stay Short The Euro

Below are the top 10 reasons we continue to recommend short EUR/USD (etf FXE) over the intermediate term TREND: 

  1. ECB Indecision:  We expect the ECB to continue to fumble with its policy messaging and for its policy “tools” to underperform its expectation to guide the economy out of its deflated state. (Interestingly, Reuters reported yesterday that Eurozone central bankers are having a working dinner with ECB President Draghi tonight to discuss his “secretive style and erratic communication”).
  2. Policy Relativity: On a relative basis, the Fed has lifted its foot off the QE gas petal while the ECB (and BOJ) is pushing down harder on the petal. Draghi has already target a €1 Trillion expansion to the ECB balance sheet. That number could go higher given the BOJ comp.  
  3. ECB All-In:  The ECB has telegraphed that it may in fact issue sovereign QE following a mixed message on the ability of the TLTROs and/or ABS and covered bond purchasing programs to deliver real growth “drugs” to the region.
  4. Into the Shadows:  The ECB has no where left to cut from the ZERO bound in interest rates.  Attempting to push the so-called shadow rate lower via large scale asset purchases becomes the recourse.  
  5. Extended Outflows:  Record outflows of investment from Europe will continue to put downward pressure on the EUR.  ECB data showed that domestic and foreign investors pulled out €187.7B from the Eurozone, which is the most since the EUR was launched in 1999.
  6. Broken Quantitatively:  The EUR/USD is broken across our intermediate and long term TREND and TAIL lines (see chart below).
  7. Downward Dog:  Eurozone country growth expectations have further room to run lower in 2014 and 2015 (just cut by European Commission). #EuropeSlowing
  8. Peripheral Pressure: The Eurozone’s PIGS, despite commitments, will struggle to meet their deficit consolidation targets, as cracks remain in the banking sector (Italy had 9 banks fail the ECB’s 130 Bank Comprehensive Assessment).
  9. Putin Pangs: Putin’s Pull over Ukraine and Western Europe’s gas looms ever present to engage the geopolitical risk card.
  10. Separatist Solidarity: The rise of the Right and splinter groups that are anti-EU [across Germany (Alternative for Germany, AfD), France (Popular Front), to bold movements across Greece, Austria, Netherlands, to name a few] are growing and calling for separation from the EUR.

This is a simplified hit parade – ping us if you’d like to dig into any of the points above.

 

Top 10 Reasons to Stay Short The Euro  - zz. euroo

 

Matthew Hedrick

Associate


Cartoon of the Day: Gas Prices

Takeaway: If all that mattered to US Consumers was gas prices (it's only 6.4% of median consumer budget) all of those rosy “surveys” would be right.

Cartoon of the Day: Gas Prices - Gas cartoon 11.04.2014


OIL: MORE DOWNSIDE?

Takeaway: OIL remains in a BEARISH Set-Up without a near-term catalyst to put in a hard support level.

In three recent notes, we highlighted why oil had more downside pressure:

TAKEAWAY: “The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves”

TAKEAWAY: “A production cut from OPEC near-term is unlikely, especially with new competition threatening to take global market share.”

TAKEAWAY:

  • “Most analysis has underestimated technological advancement in production and recovery efficiency
  • Model-driven analysis in this space anchors on old information, holding rapidly changing variables static, rather than leaning on real-time, data-driven facts

The biggest mistake in consensus analysis is that it does not accurately weigh each production area within a formation. It uses a gross average for each area within a formation with each area equally weighted.

The lowest cost areas are by far the largest producers. For example McKenzie County, ND in Bakken makes up almost 1/3rd of the formation's production and is by far the lowest cost area with a break-even price in the $20-$30 per barrel range.”

------

WTI Crude Oil is BEARISH on both a TREND and TAIL duration:

 

Oil would have to retrace and move above its intermediate and longer-term resistance levels for our model-driven process to shake its bearish bias over those durations.

 

TRADE (3 Weeks or Less) Risk Range: $76.43-$80.51

TREND (3 Months or Less) Resistance: $91.67

TAIL (3 Years or Less): $96.05

 

OIL: MORE DOWNSIDE? - WTI Levels

 

With the domestic economy slowing and deflation taking hold (#QUAD4 set-up), monetary policy out of the ECB and BOJ continue to provide support for lower oil prices.

Both WTI and BRENT moved out of red territory this morning after marginally bullish U.S. inventory data from the Department of Energy and news of a pipeline explosion in Saudi Arabia. While the weekly inventory data is always a catalyst for intraday volatility on the number, we disregard the weekly comps until we see an extended sequential trend in the time series.

 

Very simply, we continue to believe supply cuts near-term will disappoint to support current price levels.

 

Conclusion:

  • The November 27th OPEC meeting is unlikely to bring news of a collective supply cut (the aforementioned note from October 23rd explains this argument in more detail)
  • Because of the 1) Upfront Capital Commitment for many projects, 2) long-term contractual commitments, and 3) the lag for daily mark-to-market losses to become real, booked reported losses production will continue until at these levels or lower over the intermediate-term

Please reach out with any comments or questions as we continue to comment on this topic.

 

Ben Ryan

Analyst

 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next